It is possible to pay in £2,880 a year, which will be topped up to £3,600 under relief at source, even when there are no earnings.
As a registered pension scheme, the investments can grow tax-free and the benefits of compounding will be substantial, given the funds cannot be accessed for a time frame of potentially 50 year or more.
With relatively low contribution limits it is important to look at the charges, as they can have a big impact on small funds in the early years.
It would usually be the parent or legal guardian who would set up the pension and make the investment decisions, but some providers may allow grandparents or other adult family members to do so.
Another use for junior pensions is where a child is a beneficiary after a family member’s death and has funds designated to flexi-access drawdown in their name.
Josh’s grandfather passes away at age 83, leaving a pension fund of £200,000. Josh’s dad, Simon, is his only child, and is a higher rate taxpayer.
If Simon were the sole beneficiary and funds were designated to flexi-access drawdown in his name, any withdrawals he makes will be taxed at 40 per cent (or higher).
Josh is at private school and Simon is paying the fees out of his taxed income.
Fortunately, Josh’s grandfather included Josh in his nomination, which means some of his pension fund could go into a pension in Josh’s name.
Simon can manage the investments and make withdrawals at any time, as long as it is for Josh’s benefit.
This means Simon can make withdrawals from Josh’s beneficiary’s flexi-access drawdown fund to pay his school fees.
As Josh does not have any other income the whole of his personal allowance is available, so up to £12,500 can be withdrawn tax free each year (increasing in line with personal allowance).
When Josh reaches age 18, if there are funds left in his pension, then he will take over from Simon in managing his own investments and withdrawals.
Bare trust investment accounts
A child cannot legally own shares, so the easiest way to open an investment account for them is to have a bare trust account.
A bare trust document can be very simple, setting out the initial donor, trustees and who the beneficiary is.
Unlike the other type of accounts we have looked at, a bare trust does not have to be managed by the child’s parents.
They are therefore a popular option for grandparents setting up accounts for the benefit of their grandchildren that they can invest and manage.
